Morningstar's "Perspectives" series features investment insights from third-party contributors. Here, Alan Higgins, Chief Investment Officer at Coutts, gives his views on the outlook for the global economy.
Emerging markets continue to be undervalued, with too much focus on a slowing China. For all the hype, we are still sanguine about the outlook for China and Asia in general. While momentum may be easing in the region’s economic powerhouse, we believe a shift in Beijing’s growth focus from quantity to quality is desirable, providing an upbeat outlook for China itself and wider emerging markets.
The International Monetary Fund now expects 2014 growth of 7.4%, down marginally from its June forecast of 7.5% and similar to Beijing’s projections. However, we see China’s growth falling below this, towards 6.7% in 2015 as slower growth is necessary for China to ‘normalise’.
The structural reforms laid out in the Third Plenum – including population movement, reform of state-owned enterprises and financial market liberalisation – are still, in our view, the most effective way to achieve this. A tighter stance on credit growth should at least direct lending to more productive sectors of the economy, helping create better-quality growth – which we see as positive for longer-term investment in Chinese assets.
Overall, global growth remains buoyant and the US economy continues to provide a strong lead, as shown by robust jobs data on Friday – with 214,000 new jobs added and the unemployment rate falling to 5.8%.
While we have tended to be at the lower end of the range of forecasts for US growth, we now believe the world’s largest economy can achieve 3% growth in this final quarter of the year, with consumer spending strengthening.
The UK has also experienced rapid growth this year, and without a surprise spike in inflation leading to more aggressive interest-rate increases than expected, is unlikely to suffer a significant slowdown in 2015.
Europe and Japan are the weak spots within the developed markets. We believe Europe will avoid a prolonged contraction, and Japan’s slump into negative growth in the latest quarter was probably only temporary.
Disclaimer
The views contained herein are those of the author(s) and not necessarily those of Morningstar. If you are interested in Morningstar featuring your content on our website, please email submissions to UKEditorial@morningstar.com.
